Thailand Crisis Overload

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Thailand's Crisis Overload

Peter Warr

Southeast Asian Affairs, Volume 2009, pp. 334-354 (Article)

Published by Institute of Southeast Asian Studies

For additional information about this article

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Southeast Asian Affairs 2009

PETER WARR is John Crawford Professor of Agricultural Economics at the Australian

National University (ANU). He is also Convener of the Arndt-Corden Division of Econo-

mics and Director of the National Thai Studies Centre at ANU.

THAILANDS CRISIS OVERLOAD

PETER WARR

Introduction

Thailand has endured a succession of recent crises: the Asian financial crisisof 199799, originating with the collapse of its own currency and reducing

investor confidence for the entire decade since; the terrible tsunami of December

2004; outbreaks of SARS and Avian Influenza; rural drought; an interminable

insurrection in its southernmost Muslim provinces, producing more than 4,000

deaths; and growing concern about the consequences for Thailand of global

climate change. As if all that were not enough, in 2008 an additional double

crisis overwhelmed the country: a self-inflicted internal political crisis deepening

social divisions within the country and culminating in the closure of Bangkoks

international airport in late 2008; and the repercussions of the most serious global

financial crisis since the Great Depression of the 1930s.

Thailands immediate prospects are somber, along with the rest of East

Asia. In contemplating this depressing story it is easy to lose long-term per-

spective. Despite the serious problems, the quality of everyday life in Thailand

has continued to improve over several decades and poverty incidence has

maintained its long-term decline. Thailand has already achieved essentially all

of its Millennium Development Goals, well ahead of the target date of 2015,

while most developing countries lag far behind schedule. The current crisis willundoubtedly produce a pronounced economic contraction and some worsening

of poverty incidence. No one knows how long-lasting this episode of deglobal-

ization will be, but it will be temporary. It should be seen in the context of

long term economic improvement which can be expected to continue once the

global crisis subsides.
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Thailands Crisis Overload 335

Accordingly, this chapter turns first to Thailands current twin crises: the

internal political crisis and the worldwide financial crisis. It then places these

events in longer term perspective by reviewing Thailands long term economic

experience and in particular the impact of the last serious economic crisis to affect

Thailand the Asian financial crisis of 199799. To see what is likely to happen

as a result of the present contraction it is helpful to look at what happened during

previous economic downturns.

The Internal Political Crisis

Thailands ongoing political conflict is about a challenge to the social dominance

of the countrys traditional elite the educated Bangkok middle class, including

the civil service, the military, and the aristocracy. The challenge arose from a

group of political entrepreneurs who had successfully appealed to the massive

rural electorate.

The most important of these political entrepreneurs was Thaksin Shinawatra,

a clever business tycoon elected Prime Minister by large majorities in 2001 and

again in 2005. Thaksin was elected by offering populist policies to the rural

majority. But he was deposed by a military coup in September 2006, allegedly

because of corruption and because his government was said (by the generals)to be disloyal to the monarchy. Thaksin denied any such disloyalty, but while

he remained in exile after the coup, a court decision banned him from political

activity in Thailand and disbanded his Thai Rak Thai political party for alleged

electoral fraud. In addition, Thaksin was convicted in absentia for misusing his

powers while Prime Minister in support of his wifes business interests.

In the subsequent elections of January 2008 the Peoples Power Party

(PPP), a successor to Thaksins banned Thai Rak Thai, won office with right-

wing veteran politician Samak Sundaravej as its leader. Opponents of Thaksin

and his allies were enraged. They now identified themselves by wearing yellow

shirts, the royal colour, and ironically called themselves the Peoples Alliance for

Democracy (PAD). They clashed openly and violently with Thaksins supporters,

now identified at their rallies by red shirts. In late 2008 the PADs protests against

the PPP government became increasingly strident, justified mainly by the claim

that Samak and the PPP were mere proxies for the fugitive Thaksin.

While in office, Samak had continued to host a television cooking programme

and received payment for doing so. In September, the full bench of the Constitutional

Court ruled that it was unconstitutional for Samak to maintain his televisioncareer while Prime Minister, and disqualified him from office. The ruling PPP


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336 Peter Warr

promptly replaced him as Prime Minister with Thaksins brother-in-law, Somchai

Wongsawat. The PAD were even further enraged.

On 25 November the PAD occupied Bangkoks Suvarnabhumi International

Airport, causing its closure and demanding that Somchai step down. The ensuing

chaos caused great damage to Thailands tourist industry and to commerce dependent

on air freight. The airport siege ended after eight days, on 2 December, when

the Constitutional Court voted to disband the three government coalition parties,

including PPP, again for electoral fraud.

To the amazement of almost everyone, some former members of the disbanded

PPP agreed to ally themselves with the opposition Democrat Party, allowing its

leader Abhisit Vejjajiva to become Prime Minister. The PAD had previously saidit would accept no other premier than Abhisit. They were thus able to claim

the political outcome as a victory for their tactics and the banning of PPP as a

vindication of their opposition to the government on the grounds of its electoral

corruption.

Behind the political soap opera lies something basic: a dispute about the

meaning of democracy, or at least the form that democracy should take in Thailand.

The essence of the PADs objections to Thaksin and his proxies was not just

that they had acquired power through corrupt electoral practices, a claim that was

seemingly vindicated by the court decisions against Thai Rak Thai and PPP. More

fundamentally, it was a challenge to the principle of one-person-one-vote.

Thaksin had demonstrated a capacity first to enrich himself massively by

manipulating government telecommunications regulators and then to use this

wealth to advance himself politically. He was then able to use this new political

power to enrich himself, his family and his closest supporters, even further. But

he could not attain political power without mass support. His political discovery

was to find a way to harness the power of the rural electorate. The secret was to

promise them handouts at the expense of the public purse and then to deliver onthose promises. He did both of those things. Thaksin remains greatly admired by

the rural masses, the basis of his political support. These groups recognize the

economic benefits that Thaksin brought to them while in power and could not

care less about his alleged corruption or his personal greed.

Thaksin frightens the traditional elite and is despised by them. Contrary to

their name, the PAD is essentially a conservative middle class movement who

desire a return, at least partially, towards Thailands more authoritarian past. They

perceived the electoral successes of Thaksin, Samak and their allies as having

demonstrated the failure of electoral democracy because it threatened the dominant

position of the elite: the army, the civil service and the aristocracy. They have


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seen what electoral democracy can deliver and they do not like it. They would

have opposed Thaksins right to govern whether there had really been electoral

fraud, as claimed, or not.During their opposition to Samaks government, the PAD leaders demanded

that Samak step down and two basic changes be made. First, the proportion of

the Parliament that is elected should be limited to 30 per cent, the rest appointed

by the elite. Second, they demanded the possibility of a Prime Minister who was

not an elected member of Parliament. The PAD pointed out that the two most

respected Prime Ministers of recent decades, Prem Tinsulanonda and Anand

Panyarachun, were not elected but appointed by the King. The position of the

PAD was thus a rejection of one-person-one-vote electoral democracy. Beneaththis is a long-standing urban disdain for the competence of the poorly educated

rural people who elected Thaksin and Samak. Thaksin was seen as the cunning

politician who had learned how to manipulate them. It is revealing that the PAD

website includes a statement employing the term low class to describe their red-

shirted opponents. There is an undeniable social class dimension to the conflict.

Crudely put, for many of the PAD leaders and supporters, Thaksins rural voters

were ignorant buffaloes who should not be permitted to determine the leadership

and direction of the country. That role rightfully belonged to the elite.

Since Abhisits rise to power the global financial crisis has dominated public

attention and the underlying domestic political conflict has rightly been sidelined.

But when new elections are eventually held, Thaksins allies proxies or not

may well win again. Such is the magnitude of their rural support. Once that

happens, the crisis resumes. Thailand is groping, sometimes stumbling, towards

a form of democracy that suits its own circumstances. The underlying conflict is

deep and will not be resolved easily.

The Global Financial Crisis

The financial crisis is proving to be more serious than almost anyone imagined.

Credit is the lubricant facilitating the operation of the global trading system.

The supply of credit rests on the existence of trust, especially among financial

institutions, that debts can and will be honoured. The crisis has destroyed that trust.

Everyone is afraid of lending, for fear that the borrower will turn out to be unable

to repay. The global supply of credit has thus evaporated and international trade

has severely contracted. Export dependent economies such as Thailand are alreadysuffering and the prospects are for worse problems to follow. Deglobalization is

the latest grim addition to economic jargon. The recent economic forecasts of


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338 Peter Warr

Asian governments have proven to be uniformly too optimistic and, as we will

see, Thailand is no exception. As the global crisis deepens there is a continuing

danger of a protectionist response which could greatly deepen the economic

contraction, as it did in the 1930s with disastrous consequences.

The mode of transmission of the crisis to Thailand is primarily not through

its financial institutions. Fortunately, their direct exposure to the failing U.S. and

European financial institutions is small. The problem similarly does not arise

from bottlenecks on the supply side of the Thai economy. The transmission is

through a contraction in the demand for Thailands output, particularly its exports.

Along with many of its Southeast Asian neighbours, Thailand has benefited from

globalization through expansion of its exports. The downside is vulnerability toa contraction in export demand, and this is what has occurred. Export demand

corresponds to an extraordinary 75 per cent of Thailands output. In January 2009,

the year-on-year contraction in Thailands exports was 26.5 per cent, accounting

by itself for a 20 per cent contraction in aggregate demand. Consumption and

especially private investment demand have also been negatively affected, but

export demand is the main story.

Why is the contraction in exports so large? The contractions of GDP in

the U.S. and Europe are currently of the order of 2 to 4 per cent. How does

this become a decline in demand for imports from developing countries of up

to ten times that magnitude? The reason is that the financing of working capital

in the advanced economies has become very expensive and in some cases it

is unobtainable. Monetary authorities in the advanced countries are pumping

funds into the financial system as rapidly as they can, but the deterioration of

the intermediation function of the financial system means that this does not yet

translate into availability of credit to business enterprises that need it. Financial

institutions are afraid to lend to them. Retail and wholesale businesses respond to

expensive or unobtainable working capital by cutting the size of their inventories.While they attempt to achieve lower levels of inventories their demand for new

product may contract to zero.

The bad news is that a radical cut in the desired level of inventories magnifies

the contraction in the demand for new product. But the good news is that this very

large inventory component of the contraction of demand is temporary. Inventories

will not contract to zero. When they have reached their lower desired levels, the

contraction in the demand for new product will abate. The new level of demand may

be lower than the previous level, taking into account the lower level of consumer

and investor spending in the advanced economies, but it will be larger than the

level temporarily observed during a period of radical inventory downsizing.


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What can Thailand do about it? So far as the contraction in export demand

is concerned, not much; all that can be done is to ride out the storm as well as

possible. But there is the scope to expand other components of aggregate demand.

The candidates are: increasing private consumer spending (57 per cent of GDP);

increasing private investment spending (19 per cent of GDP); reducing import

spending (75 per cent of GDP); and increasing government spending (24 per cent

of GDP). Consumers and investors are rattled by the economic news and there is

limited scope to induce them to spend more in such an uncertain environment.

Both consumer spending and investment spending are declining, not increasing,

and there is very little the government can do about it.

If import demand could be reduced, that would leave more scope for domesticproducers to take up the resulting slack in demand and this is why protection

is so attractive politically in times of economic downturns. But that would be a

great mistake. Protectionism is like cocaine. It provides an immediate stimulus,

but this short-run boost is achieved only at the expense of undermining the

determinants of long-term economic performance. And is addictive; once rates of

import protection increase it is very difficult to get rid of them later.

During the Great Depression of the 1930s increasing protectionism worldwide

worsened the magnitude of the global contraction. In this, the Congress of the

United States was an ignominious leader. The Smoot-Hawley Tariff Act of

1930 set in train an increase in global protection that contributed to the depth

of the Depression and the circumstances leading to World War II. Through its

Buy American clause inserted into President Obamas current financial bailout

package, the United States Congress has revealed to the world how little it has

absorbed from its own history. It is imperative that the rest of the world not follow

suit and succumb to the temptation to increase protection. Fortunately, the Thai

government of Abhisit Vejjajiva shows every sign of being a constructive regional

leader in this respect. Prime Minister Abhisits remarks at the February 2009summit of ASEAN leaders were encouraging in their recognition of the dangers of

a resort to protectionism. But if the contraction proves to be long-lasting, can

this resolve be maintained? The question arises as much for Thailand as for any

other country.

That leaves government spending. The arithmetic is simple. Export demand

is three times the size of government spending. If export demand contracts by

10 per cent, then to make up the slack in aggregate demand, government spending

has to expand by 30 per cent, and so forth. To make up for a 26 per cent contraction

in export demand, government spending would need to expand by 78 per cent.

Nothing like that is possible.


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340 Peter Warr

There is scope for public debt to be increased and inflation is not currently

a serious concern. These are not the immediate problems. The problem is the

logistics of expanding public expenditure so quickly and by such a large amount.There is said to be a portfolio of infrastructure projects waiting on the shelf for

government approval, but this cannot be sufficient to expand spending enough

to avert a contraction of output. This is a particular problem in an environment

where corruption in public spending is a matter of great scrutiny. The same

issue arises in Indonesia. Public officials are understandably reluctant to expand

procurement quickly, for fear of making mistakes that could render them liable

later to criminal charges of corruption or malfeasance.

The government has announced its intention to expand public spending to

mitigate the impact of the contraction in aggregate demand resulting from the

crisis. That is desirable and it will reduce the magnitude of the recession that

results. But there seems no possibility that it will be sufficient to prevent negative

economic growth during 2009 and possibly 2010.

Unfortunately, the governments own economic projections do not convey

this point because they are based on unduly optimistic assumptions about almost

all components of aggregate demand, especially export demand. A report from

the governments economic planning agency, the National Economic and Social

Development Board (NESDB), released on 23 February 2009, revealed that duringthe fourth quarter of 2008 real GDP had declined by 4.3 per cent, leading to

growth for the full year of 2008 of 2.6 per cent.1 The report also projects growth

for 2009 in the major categories of aggregate demand: private consumption

(2.2 per cent), private investment (3.0 per cent), exports (6.2 per cent) and

imports (5.4 per cent). The implications of these projections are summarized in

Table 1.

Table 1 shows, in column (1), various illustrative target growth rates for real

GDP constructed by the present author. Columns (2) to (5) show, respectively, the

real growth rates of private consumption, public investment, exports and imports

projected by the NESDB. The final column (column (6)) shows the present authors

calculation of the change in public spending that would be required to achieve

the target growth rate of GDP (column (1)) given the NESDB assumptions in

columns (2) to (5). According to these calculations, to achieve zero growth of

real GDP virtually no expansion of public expenditure would be needed. Growth

of 5 per cent could be achieved with an expansion of public spending of only

20 per cent.

The problem is that almost all of the NESDB assumptions seem overlyoptimistic. Table 2 varies these assumptions in only one respect. The projected


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TAB

LE1

Thailand:R

equiredGrowthinGovern

mentExpendituretoMain

tainTarget

GDPGrowthRates(%)with

ExportGrowthasForeca

st

Target

GDP

growth

rate

Forecas

tc

hange

in

priva

teconsumpt

ion

Forecas

tc

hange

in

priva

teinves

tmen

t

Forecas

tc

hange

inexport

Forecas

tc

hange

in

import

Requ

ire

dc

hange

in

pu

blicexpen

diture

(1)

(2)

(3)

(4)

(5)

(6)

0

.0

2.2

3

.0

6

.2

5

.4

0

.4

2

.0

2.2

3

.0

6

.2

5

.4

7

.9

3

.5

2.2

3

.0

6

.2

5

.4

14

.2

5

.0

2.2

3

.0

6

.2

5

.4

20

.5

Note:

Assume

dGDP

shares:priva

teconsump

tion

57percen

t;priva

teinves

tmen

t19percen

t;exp

orts

75percen

t;imports

75percen

t;

pu

blic

expen

diture

24percen

t.

Source

:Au

thorsca

lcu

lations,

base

do

npro

jec

tions

from

Na

tiona

lEconom

ican

dSoc

ialDeve

lopment

Board

2009

.


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342 Peter Warr

TABLE2

Thailand:R

equiredGrowthinGovern

mentExpendituretoMain

tainTarget

GDPGrowthR

ates(%)withExportGrowthasinJanuary2008to

January2009

Target

GDP

growth

rate

Forecas

tc

hange

in

priva

teconsumpt

ion

Forecas

tc

hange

in

priva

teinves

tmen

t

Forecas

tc

hange

inexport

Foreca

stc

hange

in

import

Requ

ire

dc

hange

in

pu

blicexpen

diture

(1

)

(2)

(3)

(4)

(5)

(6)

2

.0

2.2

3

.0

26

.5

5

.4

54

.8

0

.0

2.2

3

.0

26

.5

5

.4

63

.1

2

.0

2.2

3

.0

26

.5

5

.4

71

.4

3

.5

2.2

3

.0

26

.5

5

.4

77

.7

5

.0

2.2

3

.0

26

.5

5

.4

83

.9

Note:A

ssume

dGDPs

hares:as

inTable

1.

Source:

Au

thorsca

lcu

lations,

base

donpro

jec

tions

from

Na

tiona

lEconom

ican

dSoc

ialDeve

lopment

Board

2009

.


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growth rate of exports actually observed between January 2008 and January

2009, 26.5 per cent, is substituted for the NESDBs projection, 6.2 per cent.

The impact is dramatic. To achieve zero growth of aggregate demand, an

impossible expansion of public spending of 63 per cent would be required. To

keep the decline of real GDP to no more than 2 per cent a 55 per cent expansion

of public spending would still be needed. These growth rates of public spending

are not feasible, so if the actual contraction of exports during 2009 turns out

to be anything like the January 2008 to January 2009 contraction, a large

contraction in GDP is inevitable. The Thai governments assumptions seem unduly

optimistic, wrongly implying that it is possible for Thailand to avoid a recession

during 2009.In any case, maintaining aggregate demand is not the same thing as

maintaining employment. The export industries releasing employees are more

labour-intensive than the average, meaning that more workers are laid off per

million baht of output contraction in these industries than would be the case for

a uniform contraction of all industries of the same money value. In other words,

the proportional contraction in formal sector employment resulting from the

export contraction will be substantially greater than the proportional contraction in

GDP.2 But public investment tends to be more capital-intensive than the average,

especially the large infrastructure projects sitting on the governments shelf waiting

for implementation. One million bahts worth of this kind of spending generates

far fewer jobs than are lost through a million baht contraction in export demand.

To maintain employment, the expansion in public investment would thus have to

be even larger than the above calculations indicate.

A Longer Term Perspective

Long Term Growth and the Asian Financial CrisisThailands long-term growth performance is described in Figure 1, showing the

level of real GDP per capita in each year (vertical bars) and its growth rate (solid

line) for the period 1951 to 2008. The figure identifies four periods of Thailands

recent economic history: I Pre-boom (until 1986); II boom (1987 to 1996);

III crisis (1997 to 1999); and IV recovery (2000 to 2008). Over the period

1968 to 1986, the average annual growth rate of Thailands real GNP was 6.7 per

cent (almost 5 per cent per person), compared with an average of 2.4 per cent

for low and middle-income countries.3 Then, over the decade 1987 to 1996, the

Thai economy boomed, growing at 9.5 per cent in real terms. Over this decade,

the Thai economy was the fastest growing in the world.


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344 Peter Warr

The crisis of 199799 rudely interrupted this boom. The economic damage

done and the hardship that resulted were both substantial. The crisis eroded

some of the gains from the economic growth that had been achieved during the

long period of economic expansion, but it did not erase them. At the low point

of the crisis in 1998, the level of GDP per capita was almost 14 per cent below

its level only two years earlier, in 1996. Nevertheless, because of the sustained

growth that had preceded the crisis, this reduced level of 1998 was still higher

than it had been only five years before that, in 1993, and was seven times itslevel in 1951.

Since the crisis, Thailands economic recovery has been moderate. The rate

of growth of real GDP has been somewhat below its long-term trend rate and

it was not until 2003 that the level of real GDP per capita had recovered to its

pre-crisis level of 1996. Foreign direct investment has declined dramatically since

1998 and private domestic investment has remained sluggish. Despite the slower

than expected recovery, in 2006 the level of real economic output per person was

19 per cent above its 1996 pre-crisis level and almost 10 times its level 55 years

earlier. The average annual rate of growth of real GDP per person over this entire

period of five-and-a-half decades was 4.2 per cent.

FIGURE 1

Thailand: Real GDP Per Capita and Growth of Real GDP Per Capita,

19512008

Source: Authors calculations, using data from NESDB, Bangkok.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Level of real

GDP per capita

15

10

5

0

5

10

15

20

Growth rate

of real GDP

per capita

Level of real GDP per capita at 2003 prices, baht, per year LHS axis

Growth rate of real GDP per capita at 2003 prices, per cent, per year RHS axis

II IIII IV


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Figure 2 places this experience in a comparative Southeast Asian perspec-

tive. Data on real GDP are presented for Thailand, Indonesia, Malaysia and

the Philippines. All data are indexed such that GDP per capita in 1970 = 100.Booms occurred in Thailand, Malaysia, and Indonesia from the mid-1980s to

the mid-1990s, interrupted by the Asian financial crisis. Thailands boom was

the largest, but most other East Asian countries (except the Philippines) were

not far behind.

As Figure 2 shows, in 199799 serious contractions occurred in Thailand,

Malaysia and Indonesia. Relative to 1996, Thailands initial contraction was the

most severe. Along with Indonesia, its contraction also lasted the longest. The

199799 crisis in all three of these countries was the collapse of the export

oriented investment booms they had shared over the preceding decade.4 For all

these countries, the crisis erased a fraction of the gains experienced during the

preceding boom, but definitely not all of those gains. The Philippines had not

experienced the boom and the Asian crisis had little discernable impact.

FIGURE 2

Indonesia, Malaysia, the Philippines and Thailand:

Real GDP Per Capita, 19602008(Indexed to 1970 = 100)

Note: Real GDP per capita is calculated using US$ at constant 2000 prices.

Source: Calculated from World Bank, World Development Indicators, various issues.

0

100

200

300

400

500

600

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Indonesia Malaysia Philippines Thailand


14/22

346 Peter Warr

Why has Thailands recovery been so slow? The crisis was a contraction

in aggregate demand, rather than a contraction in productive capacity. Labour

and capital were underutilized because there was insufficient demand for Thai

output. Where did this contraction in demand come from? Table 3 shows that

it came from private investment demand. The upper section of the table shows

the composition of expenditure on GDP in Thailand during the pre-crisis boom

TABLE 3

Thailand, Indonesia and Malaysia: Contributions to Expenditure on GDP,

19872007

Country/Period Consumption Investment Government Net exports Total

Thailand

Pre-crisis(198796)

Crisis(199799)

Post-crisis(200007)

54.8

54.0

57.6

38.9

27.0

26.0

9.9

10.5

11.3

5.0

8.5

5.3

100

100

100

Indonesia

Pre-crisis(198796)

Crisis(199799)

Post-crisis(200007)

55.0

65.0

62.1

27.8

24.5

23.7

9.1

6.5

7.7

0.4

5.0

6.6

100

100

100

Malaysia

Pre-crisis(198796)

Crisis(199799)

Post-crisis

(200007)

48.8

43.5

46.1

37.2

35.0

23.0

12.8

10.5

12.6

1.2

11.5

18.3

100

100

100

Source: Authors calculations, using data from World Bank, World Development Indicators,various issues.


15/22


(1987 to 1996), the crisis (1997 to 1999) and the post-crisis recovery period

(2000 to 2007). During the crisis, the share of investment in GDP collapsed by

13 percentage points. Investor confidence was severely damaged by the events

surrounding the crisis and during the post-crisis recovery period, this share did

not recover sufficiently to restore Thailands long-term rate of growth.

This problem of reduced investor confidence following the Asian financial

crisis was not unique to Thailand. Table 3 shows similar calculations for two other

crisis-affected Southeast Asian economies, Indonesia and Malaysia. The pattern is

similar. Finally, Figure 3 shows annual data on the share of investment in GDP

in five crisis-affected East Asian economies: Thailand, Indonesia, Malaysia, the

Philippines, and Korea. Although the contraction of private investment in Thailand

is at least as large as any other (Malaysia is similar), the figure shows that the

problem of sluggish post-crisis recovery of investment was shared by several

East Asian economies. It would not seem appropriate to look for country-specific

causes. The decline of investor confidence was region-wide, at least among the

countries seriously affected by the crisis. The crisis showed the possibility that

investors could be bankrupted by macroeconomic events over which they have

FIGURE 3

East Asia: Investment Shares of GDP, 19932007

Source: Authors calculations, using data from World Bank, World Development Indicators,various issues.

0

10

20

30

40

50

60

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Thailand Indonesia Malaysia Philippines Korea


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348 Peter Warr

no control and where they have little or no forewarning. The main point is that

a collapse of private investment was the means by which the crisis impacted

on each of these countries and that once investor confidence had been damagedrestoring it was a difficult and slow process.

Poverty Incidence and Inequality

Is economic growth really so important? Do the poor actually benefit from it, or

only the rich? If it is the latter, does a contraction in growth really matter? The

following discussion draws upon the official poverty estimates produced by the

Thai governments National Economic and Social Development Board (NESDB),

which, like all other available poverty estimates, are based upon the household

incomes collected in the National Statistical Offices Socio-Economic Survey

(SES) household survey data. Despite their imperfections, these are the only data

available covering a long time period. These survey data have been collected

since 1962. The early data were based on small samples, but their reliability has

improved steadily, and since 1988 the raw data have been available in electronic

form. A difficulty in comparing these data over time is that the poverty line has

been revised several times, changing upwards the real purchasing power that it

represents. Figure 4 summarizes the authors attempts to compile a long-term serieson poverty incidence, based on a consistent poverty line one held constant in

real purchasing power from 1962 to 2007.

Figure 4 focuses on the familiar headcount measure of poverty incidence:

the percentage of a particular population whose household incomes per person

fall below the poverty line. Until recently, the SES data were classified according

to residential location in the categories municipal areas, sanitary districts, and

villages. These correspond to inner urban (historical urban boundaries), outer urban

(newly established urban areas), and rural areas, respectively. Poverty incidence

is highest in the rural areas, followed by outer urban, and lowest in the inner

urban areas. When these data are recalculated in terms of the share of each of

these residential areas in the total number of poor people and then the share of

the total population, as in the last two rows of the table, respectively, a striking

point emerges. In 2006, rural areas accounted for 86 per cent of the total number

of poor people but only 64 per cent of the total population.

Figure 4 also shows the Gini coefficient of inequality. This index potentially

takes values between zero and one, with higher values indicating greater inequality.

The index for Thailand rose significantly over the 45 years shown. Combinedwith the reduction in absolute poverty, which occurred at the same time, this


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means that the real incomes of the poor increased with economic growth, but the

incomes of the rich increased even faster. The data reveal a considerable decline in

poverty incidence up to 1996, a moderate increase to 1998, and a further increase

over the following two years. Over the eight years from 1988 to 1996, measured

poverty incidence declined by an enormous 21.4 per cent of the population, anaverage rate of decline in poverty incidence of 2.7 percentage points per year.

FIGURE 4

Thailand: Poverty Incidence and Inequality, 19622007

Notes: Poverty incidence means the number of poor within a reference population groupexpressed as a proportion of the total population of that group. The headcount measure ofaggregate poverty incidence is the percentage of the total population whose incomes fallbelow a poverty line held constant over time in real terms; rural poverty is the percentage of

the rural population whose incomes fall below a poverty line held constant over time in realterms, and so forth. Poverty share means the number of poor within a reference populationgroup expressed as a proportion of the total number of poor within the whole population.Population share means the population of a reference group expressed as a proportion of thetotal population of that group. The data shown are identical to data published by the NationalEconomic and Social Development Board (NESDB) for the years 1988 to 2006, except thatthe published data for Municipal Areas and Sanitary Districts have been aggregated to anurban category using their respective population shares in the total for urban areas (the sumof the two) as weights. The data for the earlier years have been spliced together with thisseries from published sources so that the resulting series matches the NESDB series for theyear 1988. In accordance with the practice of the Thai government statisticians, both povertyincidence and inequality are based on incomes rather than expenditures in these data. Highervalues of the Gini coefficient indicate greater inequality.

Source: Authors calculations, using data provided by the NESDB, Bangkok.

0

10

20

30

40

50

60

70

80

90

100

1962

1969

1975

1981

1986

1988

1990

1992

1994

1996

1998

1999

2000

2001

2002

2004

2006

2007

Povertyincidence(%)

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Ginicoefficient

Total Rural Urban Gini


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350 Peter Warr

That is, each year, on average 2.7 per cent of the population moved from incomes

below the poverty line to incomes above it. Over the ensuing two years ending in

1998 poverty incidence increased by 1.5 per cent of the population. Alternatively,

over the eight years ending in 1996 the absolute number of persons in poverty

declined by 11.1 million (from 17.9 to 6.8 million); over the following two years

the number increased by 1 million (from 6.8 to 7.9 million). Thus, according to

the official data, measured in terms of absolute numbers of people in poverty, the

crisis reversed 9 per cent of the poverty reduction that had occurred during the

eight-year period of economic boom immediately preceding the crisis.

Poverty Reduction and Economic Growth

What caused the long-term decline in poverty incidence? It is obvious that over

the long term, sustained economic growth is a necessary condition for large-

scale poverty alleviation. No amount of redistribution could turn a poor country

into a rich one. Long term improvements in education have undoubtedly been

important, but despite the limitations of the underlying SES data, a reasonably

clear statistical picture also emerges on the short-term relationship between

poverty reductions and the rate of economic growth. The data are summarized

in Figure 5, which plots the relationship between changes in poverty incidence,calculated from the data used in Figure 4, above, and the real rate of growth of

GDP over the corresponding period.

Periods of more rapid economic growth were associated with more rapid

reductions in the level of absolute poverty incidence. Moderately rapid growth

from 1962 to 1981 coincided with steadily declining poverty incidence. Reduced

growth in Thailand caused by the world recession in the early to mid-1980s

coincided with worsening poverty incidence in the years 1981 to 1986. Then,

Thailands economic boom of the late 1980s and early 1990s coincided with

dramatically reduced poverty incidence. Finally, the contraction following the crisis

of 199799 led to increased poverty incidence. The recovery since the crisis has

been associated with significant poverty reduction. Economic growth matters for

the poor, as well as the rich.

As shown in Figure 5, the correlation between these two variables is

unmistakable. However, one pair of observations is a clear outlier the data

point corresponding to the period 199698, which captures the major impact of

the Asian financial crisis. It should be noted that poverty data are not available for

the years 1997 to 1999. The correlation between poverty reduction and growth,based on data for the periods before and after the crisis period, would predict


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that a large decline in GDP such as one that occurred during the crisis period

would produce a larger decline in poverty incidence than the one that actually

occurred. This point is examined more systematically in Table 4 and Figure 6.

Table 4 reports two regressions on the relationship between the rate of change

of poverty incidence (negative values mean a decline in poverty incidence), the

dependent variable, and the rate of GDP growth over the corresponding period, the

independent variable. The first regression includes all data points. The estimated

coefficient is negative as expected (the faster the growth, the greater the poverty

reduction) and significant at the 5 per cent level.

The second regression equation is the same except that the data point for

the Asian financial crisis period, 199698, is omitted. The estimated coefficient

is somewhat larger and again significant at the 5 per cent level. This second

equation is then used to predict the change in poverty incidence that would be

expected to result from the reduction in real GDP observed in the crisis. The

results are summarized in Figure 6. An annual rate of GDP growth of 6.5 per

cent (the one that actually occurred) would be expected to result in an annualincrease in poverty incidence of 4.52 per cent. The 95 per cent confidence interval

FIGURE 5

Thailand: Poverty Incidence and Economic Growth, 19622007

Source: Authors calculations using poverty data as in Figure 4 and GDP data from NESDB,Bangkok.

8.00

6.00

4.00

2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

196269

196975

197581

198186

198688

198890

199092

199294

199496

199698

19982000

200002

200204

200406

200607

Percent

Annual GDP growth Annual change in poverty incidence

Asian financial

crisis


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352 Peter Warr

TABLE 4

Thailand: Poverty Growth Regressions

Independent variable Coefficient t-statistic p-value

1. Dependent variable dP; all observations

Intercept 0.247 0.35 0.729Real GDP growth 0.346 3.01 0.011

R2= 0.430;adjR 2= 0.383; F= 9.07;p= 0.0108

2. Dependent variable dP; all observations except 199698.

Intercept 0.960 0.85 0.416Real GDP growth 0.548 2.90 0.014

R2= 0.433;adjR 2= 0.381; F= 8.40;p= 0.0145

Note: Regression equation: dP = a + by, where dP is the annual rate of change of povertyincidence between data points,yis the average annual rate of growth of real GDP betweendata points anda andb are the estimated coefficients.

Source: Authors calculations, using data from the NESDB, Bangkok.

FIGURE 6Thailand: The Growth/Poverty Nexus and the Asian Financial Crisis

Source: Authors calculations, using data as in Table 4 and Figure 5.

76543

2101234567

10 5 0 5 10 15

Annual GDP Growth (%)

Crisis: predicted,

95% confidence

interval

Crisis: actual

AnnualChangeinPoverty

In

cidence(%)

around this prediction is [2.92, 6.12], meaning that given the estimated regression

equation we can be 95 per cent confident that the level of poverty incidence thatwould result from a growth rate of real GDP of 6.5 per cent will lie within the


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range of 2.92 to 6.12 per cent. However, the observed annual increase in poverty

incidence (Crisis: actual in the figure) was only 0.8 per cent, well outside this

95 per cent confidence interval. Poverty did not increase nearly as much as would

be predicted on the basis of the contraction in real GDP.

Several hypotheses can be advanced for this seeming anomaly. One is that

the dramatic depreciation of the baht that immediately followed the crisis raised

the prices of exported commodities, including most major agricultural goods.

This benefited the rural poor but harmed the urban poor. The net effect may have

been a reduction in poverty incidence. Another hypothesis, supported by extensive

anecdotal evidence, is that Thai people assisted one another to an unusual extent

during the crisis. Urban workers, laid off from construction and manufacturingemployment returned to their extended family base in the provinces. There they

were absorbed into the business activities of the extended family and the loss of

household income (on which the poverty calculations are based) was much less

than would have otherwise occurred.

Conclusion: Thailands Twin Crises

The conclusion seems inescapable that hard economic times lie ahead for the Thai

people. Two crises will continue to bite: the countrys unresolved internal politicalconflict and the global financial crisis. Political conflict will resurface when elections

are next called. The precise form this conflict will take is unpredictable but it too

may have adverse economic consequences. Regrettably, Thailands rival political

support groups have learned that holding the public to ransom by occupying public

facilities like airports is an effective tactic. There may be more of it.

Both export demand and private investment will be negatively affected by

the global financial crisis. The economy will contract during 2009, possibly by

4 to 5 per cent. Expanded public spending will moderate the contraction that

would otherwise have occurred but there is no possibility that it could expand

sufficiently to prevent a contraction of aggregate output. The Thai economy is

resilient and the central bank has ample international reserves to ride out a crisis.

The country is as well-placed as any to emerge from the current crisis rapidly

when global economic conditions improve. Regrettably, no one knows how soon

that will happen.

Changes in poverty incidence are sensitive to the rate of growth and poverty

incidence will be impacted by the coming economic slowdown.5 Nevertheless, an

examination of the experience of the Asian financial crisis of 199799 shows thatpoverty incidence did not increase nearly as much during that period as would


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354 Peter Warr

have been predicted from the statistical relationship between poverty incidence

and economic growth. Thai people assisted one another to an unusual extent

during this period and this moderated the increase in poverty incidence that wouldotherwise have occurred. If the impact of the global financial crisis proves to be

as pronounced as is feared, this shock-absorber capacity of Thai society may

be called upon again.

Notes

The research assistance of Razib Tuhin is gratefully acknowledged. The author is responsible

for all defects.

1 The sectoral composition of this reported 2.6 per cent annual growth was agriculture

5.1 per cent, industry 3.4 per cent and services 1.2 per cent. The unusually high

reported growth in agriculture arose from reported agricultural growth of 8.6 per cent

and 9.6 per cent in the second and third quarters, respectively. These data warrant

closer examination.2 This is presumably why a contraction in exports from China is causing a decline in

total employment within China even though reported GDP growth is still 6 per cent.

Chinas export industries are highly labour-intensive.3 World Bank, WorldDevelopmentReport1998 (New York: Oxford University Press,

1998).4 Peter Warr, ed., Boom, Bust and Beyond, in Thailand Beyond the Crisis (London:

Routledge, 2005), pp. 365.5 World Bank, Thailand Economic Monitor, December 2008, World Bank Office,

Bangkok, available at .
http://www.worldbank.or.th/http://www.worldbank.or.th/

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